FAR amendment injects ethics requirements into federal contracts

That’s the gist of a Federal Acquisition Regulation (FAR) amendment that requires all federal contracts over $5 million to include a clause requiring contractors to have a written code of business ethics, an ethics awareness program for employees and an internal control system.

According to Richard Cellini, vice president of Integrity Interactive, a Boston-based corporate compliance and ethics training firm, the new measure sends a clear message to federal contractors and suppliers.

“If you want to do business with the federal government, you have to be an ethical company, and you have to have policies, programs and practices in place to make that real,” Cellini told GovPro.com.

Cellini added that the rule gives the federal government “greater power over contractors that aren’t performing up to snuff.”

 “Up until now, if the government detected illegal or unethical activity or general sleaziness on the part of a contractor, they couldn’t do anything about it as long as the contract was meeting the letter of the contractual commitment,” Cellini said. “ … Now [the government] has the tools to do something about it.”

Rule also mandates display of fraud hotline posters

The ethics requirements prescribed by the new rule only apply to contracts that meet the $5 million threshold and that have performance periods of more than 120 days. The ethics requirements do not apply to the acquisition of commercial items under FAR Part 12, to contract work performed entirely outside the United States or to existing contracts.

The new rule requires contractors to include the ethics program clause in subcontracts that are more than $5 million in value and that have a performance period of more than 120 days.

The Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council­—which, together, represent the 25 federal agencies and departments governed by the FAR—proposed the amendment Feb. 16 and published the final rule in the Nov. 23 Federal Register. The rule adds Subpart 3.10—the Contractor Code of Business Ethics and Conduct—to the FAR.

In addition to mandating ethics programs, FAR Subpart 3.10 requires government contractors to display agency fraud hotline posters. The clause only applies to contracts that exceed $5 million, and it does not apply to contractors that have established mechanisms for their employees to report suspected cases of fraud or improper conduct.

Government “raising the bar on corporate integrity”

Cellini told GovPro.com that the promulgation of Subpart 3.10 corrects “a fundamental oversight” in the Federal Acquisition Regulation: the lack of a section on contractor codes of ethics and business practices.

“The government is raising the bar on corporate integrity and accountability,” Cellini said. “The government is saying: ‘We expect more.’”

According to Cellini, research conducted by Integrity Interactive indicates that Subpart 3.10 will affect tens of thousands of companies that do business with the federal government. However, he asserted that the new rule primarily is aimed at “nontraditional government contractors” such as “the small camping service that has a $5 million contract with the forest service for pup tents.”

“The government set the threshold low to catch the nontraditional contractors, the people who are contractors but don’t think of themselves as contractors,” Cellini said. “This will be a big surprise to them.”

With the rule impacting so many contractors, the ethics requirement could be tantamount to “injecting an antibody” into the business world.

“The government is using this as a trigger to introduce pervasive, enterprisewide ethics and compliance requirements into as many companies as it can,” Cellini asserted.

The right approach to improving contractor conduct?

While most of those who responded during the public comment period expressed “general support for the rule,” according to the acquisition councils, some said that the rule—while necessary—does not take the right approach to improving contractor conduct.

Christopher Yukins, associate professor of government contract law and co-director of the Government Procurement Law Program at the George Washington University Law School, wrote that the proposed FAR Subpart 3.10 “would sharply improve integrity in federal procurement, by clarifying and strengthening the requirements for corporate compliance systems in the federal contracting industry.”

However, Yukins was one of several respondents who urged the acquisition councils to incorporate “the more detailed requirements” of the U.S. Sentencing Commission’s organizational sentencing guidelines into FAR Subpart 3.10. He said that the proposed rule—which the councils modified only slightly in its final form—“leaves some inexplicable gaps.”

“For example, the proposed rule should call for knowledgeable leadership, exclusion of risky personnel and for individuals with day-to-day responsibility for implementing compliance systems,” Yukins wrote.

The councils, in the Nov. 23 Federal Register, noted that they are considering the request for Subpart 3.10 “to more closely mirror” the U.S. Sentencing Commission’s organizational sentencing guidelines in a separate rulemaking (FAR 2007-006).

Yukins also questioned why the rule exempts contracts that involve the acquisition of commercial items, when such contracts are “equally liable to many of the myriad criminal and civil statutes that govern federal procurement.”

"They've mandated an undefined program"

Thomas Reynolds, who retired in 2006 after a 33-year career as a procurement official for the Department of Defense and the Department of Energy, wrote that the requirements in Subpart 3.10 are too vague and too difficult to enforce for the rule to “effectively correct the ethics and business conduct improprieties being experienced.”

The rule, for example, offers few specifics on what a written code of business ethics and conduct should include.

“They’ve mandated an undefined program, and I’m not quite sure how they intend to administer it,” Reynolds told GovPro.com. “ … It doesn’t seem administrable from my perspective of doing things.”

Reynolds worries that determining whether contractors are compliant with the new ethics requirements will be subject to the whims and personal interpretations of contracting officers.

“I could look at an ethics program and say that it’s acceptable, and another contracting officer within the same agency could go in and say it’s not acceptable,” Reynolds told GovPro.com. “It’s totally subjective.”

In response to such comments, the acquisition councils noted in the Nov. 23 Federal Register that Subpart 3.10 “gives businesses flexibility to design programs” and that samples of business codes of ethics are readily available online. The councils added that they will propose mandatory standards for contractors’ internal control systems in FAR Case 2007-006.

Reynolds also commented that that rule’s requirements “will create further paperwork burdens on already overburdened contracting officials.” The acquisition councils said that review of contractors’ compliance with the new ethics requirements will be “incorporated into normal contract administration.”

To access the Nov. 23 Federal Register, click here.